From Wallets to Wall Street: Why We Hate Inflation

Why is inflation widely unpopular among the public?

1. Inflation erodes the value of money.
2. Inflation introduces uncertainty about future prices, making it harder for households to plan budgets, save for long-term goals, or make major purchases.
3. Those on fixed incomes—such as retirees—are particularly vulnerable if their income doesn’t adjust to higher prices.
4. There is sticker shock when we see prices rise online or at the grocery store.
5. Inflation may erode savings.

The public tends to focus not only on how quickly those prices are changing, but also on the current price level—perhaps placing greater emphasis on the current price level.

Why is inflation viewed unfavorably by investors?

1. A rise in the rate of inflation can prompt central banks to raise interest rates.
2. Rising prices can erode profit margins.
3. Inflation can reduce consumers’ real disposable income, leading to weaker demand for goods and services.
4. Inflation introduces economic uncertainty, which increases market volatility. Investors tend to demand higher risk premiums, which can lead to lower equity valuations.
5. Rising inflation may lead to higher bond yields, which reduces the value of bonds (bond prices and bond yields move in opposite directions).

Investors tend to focus more on the rate of inflation, particularly whether it is accelerating or decelerating, than on the absolute level of prices.

Last week, investors received another dose of good news on inflation.

According to the US Bureau of Economic Analysis, the PCE Price Index was unchanged in April. The core PCE Price Index, which excludes food and energy, rose just 0.1%, the same as March.

While the PCE Price Index is not as widely recognized as the Consumer Price Index, it is similarly a comprehensive measure of price changes across the economy. Notably, the PCE is the Federal Reserve’s preferred gauge of inflation, with a longer-run target of 2.0% annually.

In April, the annual rate slowed to 2.1% from 2.3% in March, and the core rate slowed to 2.5%, which compares to 2.9% in February.

Inflation is trending in the right direction, though evidence that tariffs are meaningfully affecting consumer prices remains largely anecdotal and limited. That could change in the coming months, which is a key reason the Federal Reserve has yet to signal any plans for rate cuts.

US Exceptionalism

Discussions of U.S. exceptionalism in the stock market stem from the consistent outperformance of major U.S. indexes compared to global markets. For example, over the past decade, the Global Dow is up about 103%, while the S&P 500 Index has risen by 180%, according to S&P Global (excluding reinvested dividends, April 30, 2015 – May 22, 2025).

Since the start of the year, overseas markets have outperformed, as evidenced by the Global Dow.

A brief phase of market outperformance doesn’t automatically signal the decline of U.S. exceptionalism, as some have opined. In truth, measuring US exceptionalism solely through stock market performance is too narrow a perspective.

So, let’s provide a working definition. US, or American, exceptionalism is the belief that the nation’s history, values, and political system set it apart, suggesting that the US has a unique role to fulfill on the global stage.

America’s institutions play a key role in shaping and reinforcing the idea of American exceptionalism. These structures contribute to the nation’s stability, global influence, and unique identity. These include:

Three equal branches of government prevent authoritarian rule and reinforce democracy.

The rule of law protects individual and property rights, supporting economic stability.

The deepest and most transparent capital markets in the world attract capital from overseas.

Strong institutions, including an independent Federal Reserve, reinforce economic strength.

The world’s largest economy influences global trade, finance, and innovation, supporting the nation’s leadership role.

The US is home to many top universities, fostering intellectual leadership, technological advancements, and global influence in research and education.

The US dollar is the world’s reserve currency, and most commodities, including oil, are priced and traded in dollars (with few exceptions).

Last week, the Wall Street Journal noted that privately owned tech firms in the US valued at more than $1 billion have an estimated combined market value of $2.5 trillion, significantly surpassing China ($703 billion) and Europe ($333 billion).

Domestic innovation, according to LPL Research, “continues to rise to new heights as the US has long been a leader in technological advancements, thanks to substantial investments in research and development, a robust higher education system, and a dynamic entrepreneurial ecosystem.”

Yet, short-term stock market performance is shaped by a range of factors. While the possibility of market corrections and bear markets remains a consideration, the unique strengths of the US economy continue to attract foreign investment and reinforce confidence in American markets.

Despite inevitable challenges, this has placed the US in an enviable position. So, as we reflect on the holiday weekend, let’s remember that on Memorial Day, we honor the brave men and women who gave their lives in service to our country. Their sacrifice and courage ensure the freedoms we cherish today.

Debbie Downer

On Friday, the University of Michigan reported that the Consumer Sentiment Index for the U.S. fell to the second-lowest reading on record, with the mid-May level falling to 50.8 from April’s 52.2.

“Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy,” the Director of the Survey said.

But the survey was conducted before the White House and China agreed to a 90-day reduction in many tariffs. Late Sunday’s announcement fueled a sharp rally in stocks on Monday.

Does the slide in consumer confidence foreshadow an impending recession? Soaring inflation was responsible for the record-low reading of 50 in June 2022. Yet, the economy didn’t slide into a recession.

Nonetheless, it can’t be overstated how much John and Jane Doe despise inflation. They hate it, and it’s reflected in the University of Michigan’s survey.

Yet, the market has rallied considerably from its recent low. According to CNBC and FactSet, the S&P 500 Index rose over 18% in 25 trading days (through May 14). There have been only six such rallies of at least 18% over 25 trading days since 1970. And it’s tied to lower trade tensions.

So far, few companies have lifted prices in response to tariffs. But that could quickly change. In a CNBC interview last week, Walmart’s CFO (WMT $98) said that higher prices are forthcoming.

“We’re trying to navigate this the best that we can,” he said. “But this is a little bit unprecedented in terms of the speed and magnitude in which the price increases are coming.” Companies prioritize shareholder interests, often choosing to sustain price hikes if they can rather than let profit margins shrink.

While consumers resent rising costs and current price levels, investors are more concerned with whether tariff-driven increases will be longer lasting or a one-time adjustment.

Uncertainty persists, as import duties remain significantly higher than they were early in the year. However, recent reductions in tariffs are helping to ease concerns about disruptive price increases. We see that reflected in the market’s recovery.